Could this Week’s Economic Reports Affect Fed Decision?

By Amey Stone

There is a slew of economic data due out Tuesday and Wednesday just ahead of the Federal Open Market Committee issuing its Wednesday statement, which will be followed by a press conference. Tuesday brings retail sales and the Producer Price Index and Wednesday includes the Consumer Price Index and housing starts.

None will be enough to change rate policy, but they could influence how hawkish the FOMC’s statement and Fed Chair Janet Yellen‘s press conference are in tone.

On the economic front, investors will be looking for confirmation of steady economic growth with slowly-tightening labor markets and slowly-growing inflation pressures. After accounting for some distortions, we believe the numbers should basically support this story.

The market is pricing in just a 4% likelihood of an interest rate hike following the FOMC’s meeting this week, but that probability jumps to 50% by June.

The so-called dot plot of Fed interest rate expectations will be a focus of strategists trying to figure out what’s next. Aaron Kohli of BMO Capital writes Monday:

We believe [the dots] will be lowered as it’s unlikely that the Fed will be able to enact four hikes this year. Though the market’s pricing expects even less, the movement in the curve will hinge on what the Fed does with its dots further out, in 2017 and 2018, and the terminal rate. Should those dots remain unchanged, it would imply a steeper future hike path and the curve would respond by steepening after the release. Should all of those dots come down, however, it would benefit the belly and lead to a bull-flattener in 2s5s.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.